(Bloomberg) — There’s a subtext to this year’s blistering rally in US risk assets: When it comes to the dollar, there is no alternative.
The greenback is just shy of the record it reached during the pandemic and on pace for its best year since 2020. As measured against the currencies of America’s largest trading partners, it’s a lofty 17% above its average over the last two decades.
Wide-ranging indicators of continued US strength have fueled the recent gains, and the economic resilience has forced traders across markets to rapidly dial back expectations for imminent monetary easing by the Federal Reserve. Dollar bears now face the prospect of higher-for-longer benchmark rates that should bolster the US currency. But the dollar’s vitality goes deeper than that.
Key pillars of support — from US productivity growth and economic dynamism to a torrent of flows into American assets and homegrown technological prowess in crucial areas such as AI — reinforce the greenback’s dominant role as the world’s reserve currency despite any short-term ups and downs. These fundamentals should blunt the impact of Fed rate cuts when they do happen, and, by keeping the US economy in front of global peers, underpin the narrative of “American exceptionalism” for the foreseeable future.
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